There are various types of stable coins, each of which adopts a mechanism to stabilize their value. Central Bank Digital Currency (CBDC) is an electronic version of fiat currency. The key difference between cryptocurrencies and CBDCs is that the latter is government supported and issued by a central bank. CBDCs are linked to the value of the issuing government. What are the types of stable coins? Can we hedge against inflation?

1、 What are the types of stable currency?

1. Legal currency mortgage stable currency

The legal collateral stable currency maintains a reserve of one legal currency (or multiple currencies), such as US dollars, as collateral to guarantee the value of the stable currency. Other forms of collateral can include precious metals such as gold or silver and bulk commodities such as crude oil, but most of the stable currencies of legal collateral have dollar reserves.

These reserves are maintained by independent custodians and are regularly audited. Tether (USDT) and TrueUSD (TUSD) are popular stable currencies, supported by US dollar reserves and parity with the US dollar. By the end of August 2022, Tether (USDT) is the third largest cryptocurrency in terms of market value, with a value of more than US $67 billion.

2. Crypto mortgage stable currency

The stable currency of crypto mortgage is supported by other cryptocurrencies. Because reserve cryptocurrencies may also tend to be highly volatile, such stable coins are over mortgaged - that is, the value of cryptocurrencies held in reserves exceeds the value of stable coins issued.

The cryptocurrency worth US $2 million can be used as a reserve to issue a stable currency backed by US $1 million cryptocurrency to ensure a 50% drop in the price of the reserve cryptocurrency. For example, MakerDAO's Dai (DAI) stable currency is linked to the US dollar, but is supported by ETH and other cryptocurrencies. Its value is 150% of the DAI stable currency in circulation.

3. Algorithm stable currency

Algorithm stable capital may or may not hold reserve assets. Their main difference is the strategy of maintaining stable coin value by controlling its supply through algorithms, which is essentially a computer program running preset formulas.

In some aspects, this is not very different from the central bank, and the central bank does not rely on reserve assets to maintain the stability of the value of its issued currency. The difference is that a central bank such as the US Federal Reserve makes monetary policy openly according to well-known parameters, and its identity as the issuer of fiat money has produced miracles on the credibility of the policy.

Coin issuers with stable algorithms cannot rely on such advantages in a crisis. On May 11, 2022, the price of TerraUSD (UST) algorithm stable currency plummeted by more than 60%, which evaporated the link with the US dollar, because the price of the relevant Luna token used to link Terra plummeted by more than 80% overnight.

2、 Can a stable currency hedge against inflation?

The traditional fiat currency is prone to inflation, especially in developing countries. On the contrary, currencies such as the US dollar or the euro are more resistant to inflation. Stable currencies like Tesser and USDC are linked to the US dollar, which makes them excellent tools to fight against inflation. For example, individuals can convert their money into a stable currency and get inflation in dollars, thus keeping their money more valuable. Therefore, the stable currency allows users to enter the door of global financial prosperity. Any individual who can access the Internet can use stable currency for daily transactions. Cross border payment allows users to participate in the global economy.

summary

What are the types of stable coins? Can a stable currency hedge against inflation? The answer to these two questions. A stable currency attempts to link its market value to some external reference, usually a fiat currency. As a medium of exchange, they are more useful than more volatile cryptocurrencies. A stable currency may be linked to currencies such as the US dollar, or to the price of commodities such as gold, or use an algorithm to control supply. They also use reserve assets as collateral or use algorithmic formulas to control supply.